340. Goldman Sachs: The Vampire Squid Thrives On

For a five-star review of my Dark Knowledge, go here and scroll down.

SMALL  TALK

     He's back.  At least, I think it's the same guy.  A ragpicker, probably homeless, who is squatting on the sidewalk in the little park across the street from my building.  This time I haven't laid eyes on him, because he's lying under a pile of blankets pulled over his head.  But I think he's the same guy who was here a year ago, and this time with even more stuff.  In the gutter next to his blankets -- more accurately, in the bike lane -- are no less than four carts, each piled high with loot, most of it in a rainbow of bulging plastic bags, dozens of them, scores, if not hundreds.  Packed, I assume, with recyclables, though he and his cart have now been there for at least three days.  There's other stuff crammed in among the bags on the carts: pots and pans, a small air-conditioner, a blanket or fabric of some kind, scraps of clothing, parts of a vacuum cleaner, other hulking strange objects, and poles that poke out at odd angles, suggesting mops or brooms or legs of some unidentified object.

      If he's collecting recyclables, as some homeless people do, why hasn't he recycled them?  Instead, he amasses and amasses, and now, with his carts heaped high, snoozes under blankets in the cold. Will the police make him move on?  No sign of it.  Two days ago I saw a squad car at the curb, and officers looking him and his stuff over. He must have looked harmless to them, because they then left without bothering him.  So there he is, with his amassed treasures.  If I see him, I won't approach him, because when I approached him a year ago -- if indeed it was the same guy -- his eyes flashed angrily and he yelled at me to get out.  Not someone you want to cultivate socially, then, but a king of ragpickers.  I've never seen anyone with so much stuff heaped up on carts in public.  

Goldman Sachs: The Vampire Squid Thrives On 

     “It’s everywhere.  The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

A vampire squid.
Citron/CC-BY-SA-3.0

Mouth of a vampire squid.

     So wrote journalist Matt Taibbi in a memorable article of July 9, 2009, in Rolling Stone magazine, presenting an image that resonated then and still resonates.  His target was the multinational investment banking firm Goldman Sachs, now headquartered in a soaring 44-story tower at 200 West Street in Lower Manhattan.  Certainly this ultra-modern edifice proclaims its occupant a major player in the global world of finance, and one not to be trifled with.  So why has it inspired such venom?  I know nothing of vampire squids, but I’m sure I wouldn’t care to meet one.  And why, when I utter the words “Goldman Sachs” to friends and acquaintances unversed in the world of finance, do they reply with phrases like “big investment firm … dubious practices … cheating”?  What’s the story with this alleged blood-sucking predator?  Does it really merit such censure?  Bear with me as I, a layman with no special knowledge of finance, poke into the story and try to find some inklings of the truth.

The Goldman Sachs Tower at 200 West Street.
Beyond My Ken

     First, a little history.  Who was Goldman and who was Sachs?  The firm was founded by Marcus Goldman, a Jewish German immigrant from Bavaria who began as a peddler with a horse-drawn cart in Philadelphia, became a shopkeeper, and later removed to New York, where in 1869 he opened an office dealing in IOUs.  (If you don't quite grasp that, neither do I, but it sure paid off.)  In 1882 his son-in-law Samuel Sachs joined the firm, which from then on was known as Goldman Sachs.  The firm prospered, turning over $30 million in commercial paper a year, and in 1896 joined the New York Stock Exchange.  No longer controlled by the Goldman family, in the twentieth century the firm survived the 1929 crash and became involved in investment banking as well as trading.  Today its stock is publicly traded, much of it owned by institutions like pension funds and banks.  It has a global presence, and its former employees have served on the White House staff and headed the New York Stock Exchange, the World Bank, the U.S. Treasury Department, the New York Federal Reserve, Citigroup, and Merrill Lynch.  Rare is the financial pie it doesn’t have its finger in.  So it is indeed everywhere, but is it a vampire squid?

    For me, in the 1990s the face of Goldman Sachs was that of Abby Joseph Cohen, the firm’s chief investment strategist, who often appeared with one or two other women in the semiannual Barron’s roundtables, where a dozen or so financial experts were assembled to forecast the near-term developments of the economy and the markets.  (Yes, in those days I was actually reading, or at least scanning, Barron’s.)  Abby had reaped renown by predicting the bull market of the 1990s, and there was something about her that won you over.  New York-born, she looked unpretentious in photos,  nothing glitzy, little or no jewelry, her hair short, with the warmest smile: a Jewish momma from Queens who had made good in the hard-slugging male world of finance.  You simply wanted to believe her and wish her well.  And she was indeed a momma, having two teen-age daughters.  You couldn’t imagine her arriving at the office in a chauffeured limousine (though maybe she did), or jetting about the world to attend exclusive financial gatherings or advise clients (though in fact she did).  Abby was one of us.

Abby Joseph Cohen

     So influential was she in the 1990s that when a rumor hit Wall street in 1996 that she was switching from bull to bear, the Dow Jones Industrial Average plunged 60 points; then, when she got on the firm’s worldwide communications system to refute the rumor, it bounced back up again.  Power was hers.

     Alas, like many other experts, Abby failed to predict the brutal bear market of 2000 and was ridiculed for her persistent bullishness as stocks plummeted.  Worse still, again like most experts, she failed to foresee the brutal bear market of 2008, and in March of that year was replaced as Goldman Sachs’s chief forecaster.  But she continued to be associated with the firm and today, though semi-retired, is still an advisory director with the firm.

      In the 2007-2008 mortgage crisis that caught so many investment firms by surprise, Goldman Sachs sold subprime mortgage-backed securities short, so while other outfits faced catastrophic losses, it was reaping billions in profit.  In my eyes, nothing wrong with that; it was just smarter than the rest of the boys.  (No gender bias intended; this was a boys’ game primarily.)  No wonder the New York Times proclaimed Goldman Sachs without a peer in the world of finance.

     But then the picture darkened.  In October 2007 a Fortune magazine senior editor noted that Goldman Sachs had sold a $494 million issue backed by risky second-mortgage loans, the very kind of transaction that had facilitated the housing bubble, and the resulting bust that triggered the financial crisis then under way.  Was Goldman Sachs too shrewd for its own good?  Not in this instance.  Many borrowers defaulted on these junk mortgage loans, and investors who bought the issue suffered heavy losses, but not Goldman Sachs, since it had shorted the junk mortgage market, betting that prices would drop.  Clever Goldman!

     Even so, Goldman Sachs was not immune as the financial crisis developed.  Chaos followed when Lehman Brothers went into bankruptcy, triggering panic throughout the world.  Then in September 2008 Goldman Sachs became a traditional bank holding company, ending the era of wild investment banking on Wall Street.  Why did it do this?  To get aboard the federal gravy train, of course.  The change in its status meant that it would henceforth be regulated by the Federal Reserve, so that it qualified for a $10 million investment from the U.S. Treasury as part of the Troubled Asset Relief Program (TARP), a government program to purchase assets from troubled financial institutions in hopes of stabilizing a very shaky financial system.  In other words, the government used taxpayers’ money to bail out Goldman Sachs and other big financial institutions endangered by their risky speculative investments.  Big Brother was rescuing the bad boys when their misdeeds came home to roost.  (Pardon the inept image.)  To be sure, the firm repaid the Treasury’s TARP investment with 23% interest in June 2009, so the government was not suckered in the deal. 

Henry M. Paulson, Jr.

     And who was Treasury Secretary during all these tumultuous events?  Henry M. Paulson, Jr., a former Goldman Sachs CEO.  And who were his assistants at Treasury?  A clutch of other Goldman alumni, all of them talented, but it does make one wonder.  Goldman insisted that, in a time of dire crisis, they were serving their country by making their expertise available in Washington.  Though unaware that patriotism raged on Wall Street, I’ll grant that in this assertion there may be a grain, a tiny grain, of truth.  And in Washington one makes so many useful contacts…

     These complicated financial doings can only baffle the layman.  Is Goldman Sachs a good guy or a bad guy?  If only it were that simple.  To even have a clue, you have to understand at least a little what these complex financial transactions involved.  Derivatives, it should be noted, are contracts deriving their value from some underlying entity such as an index or an interest rate or an asset, in this case subprime mortgages (sometimes endearingly termed “junk mortgages”).  And so, that said, here is what this layman has grasped:

1.    Back in 2000 Congress, in its infinite wisdom, passed something called the Commodities Futures Modernization Act, which, inserted at the last minute into an 11,000-page spending bill with almost no debate, “modernized” derivatives trading by freeing it from most existing federal regulations.  In this shadowy sector of the market, then, banks like Goldman Sachs were free to do as they wanted.

2.    Eager home buyers were encouraged to take out a mortgage, even though their shaky finances made it unlikely that they could make the periodic payments required.  As Barnum said, there's one born every minute.

3.    These subprime mortgages were bundled into packages of risky mortgage-backed securities (a form of derivative) and sold by Goldman Sachs and other banks to unsuspecting pension funds and insurance companies.

4.    Even as it was doing this, Goldman Sachs was betting that the value of these mortgage-backed securities would decline, which it did.

5.    The buyers of these securities suffered a whopping big loss.

6.    Goldman Sachs raked in a whopping big profit.

7.    Meanwhile lots of homeowners were defaulting on their mortgage payments and facing foreclosure, meaning they would lose their homes.

The enticement: a subprime mortgage offering, 2008.  But God help those who were enticed.
The Truth About

     What is one to make of all this?  The home buyers acted unwisely, but they were encouraged to do so, and all they wanted was to own their own home.  The buyers of the securities failed to do their homework, didn’t grasp how risky their investment was; they paid the price of their negligence.  Goldman Sachs, by selling risky securities that it wanted to see decline in value, may or may not have been committing securities fraud (it depends on who you talk to), but this was hardly ethical.  And why were these risky securities, backed by junk mortgages, on the market anyway?  Because too much money was looking for too few investments; in the absence of sound investments, investors were offered junk, which they eagerly snapped up.  Permeating the whole scene was ignorance on the part of some, and feverish greed and wild speculation on the part of others – a formula for disaster.  And disaster came.

     If you’re still baffled by all this, so am I.  These are complex and esoteric financial matters best understood only by seasoned traders and analysts, which makes these markets just that much harder to regulate.  Laymen could just ignore the whole shebang, except that this unregulated market provoked a financial crisis that engulfed us all, and whose repercussions were long felt.  Ask anyone who couldn't find a job, or had to hold two or three jobs to support themselves, or lost their home through foreclosure.

     It is interesting to note that, in the crisis year of 2008, Goldman Sachs paid $14 million in taxes.  Does that sound like a lot?  Its profit that year was $2.3 billion, and in 2009 it paid its CEO $42.9 million.  But how could it pay a mere 1% in taxes?  Because it shifted its earnings to subsidiaries in low-tax or no-tax countries, a manipulation beloved of multinational corporations and quite legal; it had 15 subsidiaries in the Cayman Islands alone.  Said one Democratic Representative from Texas, “With the right hand out begging for bailout money, the left is hiding it offshore.”  Ah, clever Goldman, it doesn’t miss a trick.  

     

     Or does it?  As a result of the 2017 tax reform bill passed with glee by the Republicans, Goldman will pay the government a onetime "repatriation tax" of $5 billion for money held overseas. And will it then bring the money back to the U.S.?  The firm declines to say.  Its report for the fourth quarter of 2017 announces its first quarterly loss since 2011, a result not just from this onetime payment, but also from its trading.  The markets have been less volatile than usual, meaning calm, without sudden and dramatic ups and downs, causing its clients to trade less frequently.  On January 17, as soon as this bad news was reported, Goldman's stock plunged 3 percent, and a New York Times article of January 18 was captioned, "Weak Results For Goldman Show Depth of Its Fall."  Granted, these developments tarnish Goldman's image of invincibility, but don't count it down or out, since in the long run it will benefit from the new law.  The squid has a way not just of surviving but of richly prospering.  

     In 2012 Greg Smith, the former head of the Goldman Sachs equity derivatives business in Europe, the Middle East, and Africa, resigned his position, saying in a letter made public in the New York Times that Goldman had a “toxic and destructive” environment in which “the interests of the client continue to be sidelined.”  This caused quite a stir, even though his account was found to be wanting in specific details.

          On the positive side:

·      The Goldman Sachs Foundation has given $114 million in grants to promote youth education worldwide.

·      Goldman has been on Fortune magazine’s 100 Best Companies to Work For list since 1998, with emphasis on its support for employee philanthropy.

·      In 2008 it initiated the 10,000 Women program to train women from developing countries in business and management.

·      In 2008 it pledged $500 million to help small businesses in business and management education and philanthropy.

·      In 2012 it offered a loan of $9.6 million to deliver therapeutic services to teenage inmates on Rikers Island.

     So is Goldman Sachs a great vampire squid, as alleged in the Rolling Stone article?  How is a layman to say?  But a Forbes magazine article of August 8, 2013, entitled “The Great Vampire Squid Keeps on Sucking” said the following:

Goldman Sachs, the vampire squid, and its Wall Street cohorts see money everywhere.  They will attempt to squeeze a deal even if it’s not a banking project.  Like street thugs, Wall Street banks are manipulating prices, such as aluminum, to profit.  The result is higher prices for consumers.

If even the financial press condemns Goldman Sachs, the basic charges of the Rolling Stone article would seem to be confirmed.  Big financial institutions like Goldman Sachs have money and connections and power.  What they don’t have is respect.

BROWDERBOOKS  

All books are available online as indicated, or from the author.

1.  No Place for Normal: New York / Stories from the Most Exciting City in the World (Mill City Press, 2015).  Winner of the Tenth Annual National Indie Excellence Award for Regional Non-Fiction; first place in the Travel category of the 2015-2016 Reader Views Literary Awards; and Honorable Mention in the Culture category of the Eric Hoffer Book Awards for 2016.  All about anything and everything New York: alcoholics, abortionists, greenmarkets, Occupy Wall Street, the Gay Pride Parade, my mugging in Central Park, peyote visions, and an artist who made art of a blackened human toe.  In her Reader Views review, Sheri Hoyte called it "a delightful treasure chest full of short stories about New York City."

If you love the city (or hate it), this may be the book for you.  An award winner, it sold well at BookCon 2017.

Review 

"If you want wonderful inside tales about New York, this is the book for you.  Cliff Browder has a way with his writing that makes the city I lived in for 40 plus years come alive in a new and delightful way. A refreshing view on NYC that will not disappoint."  Five-star Amazon customer review by Bill L.

Available from Amazon and Barnes & Noble.

2.  Bill Hope: His Story (Anaphora Literary Press, 2017), the second novel in the Metropolis series.  New York City, 1870s: From his cell in the gloomy prison known as the Tombs, young Bill Hope spills out in a torrent of words the story of his career as a pickpocket and shoplifter; his brutal treatment at Sing Sing and escape from another prison in a coffin; his forays into brownstones and polite society; and his sojourn among the “loonies” in a madhouse, from which he emerges to face betrayal and death threats, and possible involvement in a murder.  Driving him throughout is a fierce desire for better, a persistent and undying hope.

For readers who like historical fiction and a fast-moving story.

Reviews

"A real yarn of a story about a lovable pickpocket who gets into trouble and has a great adventure.  A must read."  Five-star Amazon customer review by nicole w brown.

"This was a fun book.  The main character seemed like a cross between Huck Finn and a Charles Dickens character.  I would recommend this."  Four-star LibraryThing review by stephvin.

Available from Amazon and Barnes & Noble.

3.  Dark Knowledge (Anaphora Literary Press, 2018), the third novel in the Metropolis series.  Adult and young adult.  A fast-moving historical novel about New York City and the slave trade, with the sights and sounds and smells of the waterfront. 

The back cover summary:

New York City, late 1860s.  When young Chris Harmony learns that members of his family may have been involved in the illegal pre-Civil War slave trade, taking slaves from Africa to Cuba, he is appalled.  Determined to learn the truth, he begins an investigation that takes him into a dingy waterfront saloon, musty old maritime records that yield startling secrets, and elegant brownstone parlors that may have been furnished by the trade.  Since those once involved dread exposure, he meets denials and evasions, then threats, and a key witness is murdered.  Chris has vivid fantasies of the suffering slaves on the ships and their savage revolts.  How could seemingly respectable people be involved in so abhorrent a trade, and how did they avoid exposure?  And what price must Chris pay to learn the painful truth and proclaim it?

Early reviews

"A lively and entertaining tale.  The writing styles, plot, pace and character development were excellent."  Four-star LibraryThing early review by BridgitDavis.

"At first the plot ... seemed a bit contrived, but I was soon swept up in the tale."  Four-star LibraryThing early review by snash.

"I am glad that I have read this book as it goes into great detail and the presentation is amazing.  The Author obviously knows his stuff."  Four-star LibraryThing early review by Moiser20.

Just released; available from Amazon and Barnes & Noble.

4.  The Pleasuring of Men (Gival Press, 2011), the first novel in the Metropolis series, tells the story of a respectably raised young man who chooses to become a male prostitute in late 1860s New York and falls in love with his most difficult client.

What was the gay scene like in nineteenth-century New York?   Gay romance, if you like, but no porn (I don't do porn).  Women have read it and reviewed it.  (The cover illustration doesn't hurt.)

Reviews

"At times amusing, gritty, heartfelt and a little sexy -- this would make a great summer read."  Four-star Amazon customer review by BobW.

"Really more of a fantasy of a 19th century gay life than any kind of historical representation of the same."  Three-star Goodreads review by Rachel.

"The detail Browder brings to this glimpse into history is only equaled by his writing of credible and interesting characters.  Highly recommended."  Five-star Goodreads review by Nan Hawthorne.

Available from Amazon and Barnes & Noble.

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Coming soon:  Nightshades and Aphrodisiacs: Getting It On and Up in the Kitchen

©   2018   Clifford Browder